SECTION 10

1. SECTION 10 Accounting Policies, Estimates, and Errors

2. #1 Question #1True or False: Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.

3. TRUE • Changes in accounting estimates are adjustments to the carrying amount of an asset or liability, or the amount of the periodic consumption of an asset that results from the assessment f the present status of, and expected future benefits and obligations associated with, assets and liabilities. • Prior period errors are omissions from, and misstatements in the entity’s financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information.

4. #2 True or False: If the IFRS for SMEs does not specifically address a transaction, other events or condition, an entity’s management shall refer to the most recent pronouncements of other standard-setting bodies.

5. FALSE Section 10.6 says: If the IFRS for SMEs does not specifically address a transaction, other events or condition, an entity’s management shall use its judgment in developing and applying an accounting policy subject to relevance and reliability.

6. #3 If the IFRS for SMEs does not specifically address a transaction, other event or condition, what is the most authoritative source in developing and applying an accounting policy?

7. #3 • The requirement and guidance in the IFRS for SMEs dealing with similar and related issues • The requirements and guidance in full IFRS dealing with similar and related issues • The definition, recognition criteria and measurement of asset, liability, income and expense and Section 2 (Concepts and Pervasive Principles) • Most recent pronouncement of other standard-setting bodies

8. A FOR SMEs: (descending) • IFRS for SMEs dealing with similar and related issues • Definitions, recognition, criteria and measurement concepts for assets, liabilities, income and expenses and the pervasive principles in Section 2-Concepts and Pervasive Principles • The requirements and guidance in full IFRS dealing with similar and related issues FOR FULL IFRS:(descending) • Full IFRS dealing with similar and related issues • Definitions, recognition, criteria and measurement concepts for assets, liabilities, income and expenses from the Conceptual Framework • Most recent pronouncements of other standard-setting bodies, other accounting literature and accepted industry practices to the extent that these do not conflict with the concepts in IFRS.

9. #4 True or False: The entity shall select and apply its accounting policies consistently for all similar transactions, other events and conditions.

10. FALSE Section 10.7 states an exception: “unless this IFRS specifically requires or permits categorization of items for which different policies may be appropriate.”

11. #5 True or False: An entity shall change an accounting policy only if it is required by changes to the IFRS.

12. FALSE Section 10.8 cites two instances: • Is required by changes to the IFRS for SMEs • Results in the F/S providing reliable aand more relevant info about the effects of transactions, other events or conditions on the entity’s B/S, I/S or C/F.

13. #6 True or False: The application of an accounting policy for transactions, other events or conditions that differ in substance from those previously occurring is considered a change in accounting policy.

14. FALSE Section 10.9 says: The application of an accounting policy for transactions, other events or conditions that differ in substance from those previously occurring is NOT a change in accounting policy.

15. #7 True or False: The application of a new accounting policy that did not occur previously or were not material is a change in accounting policy.

16. FALSE Section 10.9 says: The application of a new accounting policy that did not occur previously or were not material is NOT a change in accounting policy.

17. #8 True or False: A change to the cost model when a reliable measure of fair value is no longer available for an asset that the IFRS for SMEs would otherwise require or permit to be measured at fair value is NOT a change in accounting policy.

18. TRUE Section 10.9 says: A change to the cost model when a reliable measure of fair value is no longer available (or vice versa) for an asset that this IFRS would otherwise require or permit to be measured at fair value is NOT a change in accounting policies.

19. #9 True or False: Changes in accounting policies should always be effected retrospectively.

20. FALSE Section 10.11 cites 3 instances: • FOR CHANGES REQUIRED BY IFRS: • according to transitional provisions of the amended IFRS for SMEs • if an entity has elected to follow IAS 39 (FI recognition and Measurement), according to transitional provisions of the amended IFRS • FOR VOLUNTARY CHANGES • Retrospectively Section 10.12 says: • “When it is impracticable,…., the entity shall apply the new acctg policy to the carrying amounts of assets and liabilities as at the beginning of the earliest period for which retrospective application is practicable, WHICH MAY BE THE CURRENT PERIOD…”

21. #10 True or False: If the IFRS allows a choice of accounting treatment for a specified transaction or other event or condition and an entity changes its previous choice, it is not a change in accounting policy.

22. FALSE Section 10.10 says: If this IFRS allows a choice of accounting treatment (including the measurement basis) for a specified transaction or other event or condition and an entity changes its previous choice, that is a change in accounting policy.

23. #11 True or False: When it is difficult to distinguish a change in an accounting policy from a change in an accounting estimate, the change is treated as a change in an accounting policy.

24. FALSE Section 10.15 says: When it is difficult to distinguish a change in an accounting policy from a change in an accounting estimate, the change is treated as a change in an accounting estimate.” (PRUDENCE)

25. #12 True or False: The entity need not follow a requirement in the IFRS for SMEs if the effect of doing so would not be material.

26. TRUE If the IFRS for SMEs specifically addresses a transaction, other event or condition, an entity shall apply this IFRS. Exception: -If the effect of doing so would not be material

27. #13 True or False: An entity can only implement a change in accounting estimate if it will affect F/S line items in future periods

28. FALSE Section 10.16 cites two instances: • during the period of change • during the period of change AND FUTURE PERIODS, if the change affects both.

29. #14 Prior period errors include the effects of the following except: • Mistakes in applying accounting policies • Oversights of facts • Fraud • None of the above

30. D Section 10.20 says: Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretation of facts, and f

31. #15 Which of the following is not needed to be disclosed in a change of accounting policy?

32. #15 • The nature of the change • The amount of adjustment relating to periods before those presented, to the extent possible • An explanation if it is impracticable to determine the amount to be disclosed • None of the above

33. D

34. SECTION 11 Basic Financial Instruments

35. #1 True or False: When accounting for financial instruments, the entity has the choice to use section 11 and 12 of the IFRS for SMEs in full or IAS 39 in full.

36. False The entity does have a choice of what accounting policy to use but if they decide to use IAS 39, they may do so only with regards to recognition and measurement. As per disclosures, the entity should still use section 11 and 12.

37. #2 The following are accounted for as basic financial instruments, except: a. A receivable recognized for long-term loans made to another entity. b. Cash purchase of another entity’s ordinary shares. c. Cash purchase of another entity’s convertible preference shares. d. None of the above.

38. C According to section 11.8 and 11.11, investments in convertible preference shares do not fall under the definition of basic financial instruments. This is under Section 12. Other examples include cash, demand deposits, A/R, A/P, N/R, N/P, L/R, L/P, B/P and investments in nonputtable and nonconvertible shares

39. #3 Which of the following is not a characteristic of a basic debt instrument? a. Its return could be fixed, variable or a mix of both as long as if the rate is variable, it is based on a quoted or observable rate b. It does not contain a contractual provision that could result in the holder losing principal in current or prior periods c. Its contractual provisions to prepay are contingent to future events d. It contains no conditional returns except its variable return or prepayments not contingent to future events.

40. C Aside from C, all are characteristics of a basic debt instrument. C is wrong because contractual provisions to prepay should not be contingent on future events.

41. #4 The following financial statements will be measured at the transaction price plus transaction costs, except: a. A receivable recognized for goods sold. b. A loan received from a bank. c. Receivable for item sold on a two-year interest free credit. d. Receivable from sale of goods in which is deferred beyond normal business terms.

42. D When payment is deferred beyond normal business transactions, it is considered as a financing transaction. Financing transactions can also be instruments financed at a non-market interest rate. In these cases, initial measurement is the present value of future payments discounted at the market rate of interest for a similar debt instrument.

43. #5 Which of the following is true? a. The amortized cost of a financial asset is net of the amount at which the financial asset is measured at initial recognition . b. Financial asset that have no stated interest rate are initially measured at an undiscounted amount. c. Effective interest rate method does not include allocation of the interest income or interest expense. d. None of the above.

44. A B is wrong because financial assets and liabilities that have no stated interest are measured at amortized cost if the instrument is noncurrent. The statement becomes true, however, for current assets and liabilities. C on the other hand is wrong because the method is precisely a method of allocating interest income and expense. As you know, amortized cost is computed as the measurement at initial recognition subtracted by loan repayments and impairment and added/subtracted by cumulative amortization.

45. #6 Which of these statements is true? a. All kinds of debt instruments, whether as a financial asset or liability, are measured at amortized cost. b. All investments in nonputtable and nonconvertible preference/ordinary shares held for trading are measured using FVTPL c. The firm has a choice to measure investments in debt as FVTPL, AFS or HTM according to the purpose of the firm. d. None of the above.

46. B Not all kinds of debt instruments are measured at amortized cost as current debt instruments are measured at its undiscounted carrying cost. Also, investments in debt could not be measured as FVTPL or AFS. Lastly investments in either debt or equity cannot be classified as AFS unless the entity adapts IAS 39 as its accounting policy. This is one of the two main differences between the IFRS for SMEs and the full IFRS.

47. #7 True or False. For an instrument measured at amortized cost, the impairment loss is the difference between the asset’s carrying amount and the present value of estimated cash flows discounted at the asset’s current effective interest rate.

48. False As we learned in 114, impairment is measured by the estimated cash flows discounted at the asset’s original effective interest rate.

49. #8 True or False. Reversal of an impairment loss shall result in carrying amount that exceeds what the carrying amount would have been had the impairment not previously been recognized.

50. False Again as we learned in 114, reversal of an impairment result should not exceed what the carrying amount would have been had the impairment not previously been recognized.